The orthodox and unorthodox approaches to economic development
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The Orthodox and Unorthodox Approaches to Economic Development 经济发展的方法论. Lecture Series at Central South University, Changsha Presented by Dr. QIJIN WU Vice President Hunan Branch The Export and Import Bank of China April 22th, 2012. State and Market. The East Asian Miracle

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The Orthodox and Unorthodox Approaches to Economic Development 经济发展的方法论

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The Orthodox and Unorthodox Approaches to Economic Development 经济发展的方法论

Lecture Series at Central South University, Changsha

Presented by


Vice President Hunan Branch

The Export and Import Bank of China

April 22th, 2012

State and Market

The East Asian Miracle

Views on the evolving role of the state in economic development

Economies of the Asian Miracle

Competing theoretical paradigms:

The proponents of competing paradigms practice their trades in different worlds ... [they] see different things when they look from the same point in the same direction.

(Kuhn 1970: 150)

Orthodox view of the role of state (based on allocative/static models):

  • To protect the vulnerable and ensure an equitable distribution of income

  • To provide an institutional environment in which markets can flourish

  • To correct market imperfections (market failure) provide public goods

  • So, generally little role for industrial policy??

Rapid Growth

Persistence of Growth

Life expectancy at birth


Export Penetration

What was key to HPAEs success? What caused the miracle? Can it be replicated?

Doing fundamentals well:

  • Rapid accumulation both physical and human capital made possible by very high savings rates

  • Stable and predictable macroeconomic environment

  • Sound financial institutions

  • Secure property rights

  • Complementary investments in infrastructure

Why is investment in human capital important?

To facilitate the formulation of learning curve

Coordination problems may hinder human capital formation, so there is a reason for the state to intervene.

Imperfect markets (loans for schooling)

Externalities as well (such as sharing of ideas, less contagious disease)

Features that promoted human capital formation

  • Economic growth

  • Declining population growth

With significant savings….

Also fuelled by

  • Equality in distribution of income

  • But most importantly of all a focus on basic education, East Asian NICs made good use of available investment resources on education

High savings because

  • Control of inflation (avoided fiscal deficits) hence positive or mildly negative real interest rates

  • Stable banking sectors because of regulatory oversight

  • Demography (dependency ratio fell)

  • Public consumption quite low (minimal role of state)

High rates of investment:

  • Secure property rights

  • Complementary infrastructure investment

  • Low relative price of capital goods

  • Capital controls

  • Tax incentives

  • Moderate repression of interest rates (most controversial) (EAMR, 1993: 237) (getting the prices right? See Amsden, 1989)

Low price of capital goods

So, success was because

  • ‘fundamentals’ were right: stable macroeconomic environment, universal primary education, sound and solvent financial institutions, secure property rights, complementary investments in infrastructure, low relative prices of investment goods

But what interventions did actually take place?

  • Industrial and trade policies (policies targeting of industries to change industrial structure)

  • Key among these was financial repression/direction

  • Nurturing of big business in key sectors

  • Selective tax and tariff policies (to protect industries)

  • Creating contests (restriction also of competition)

  • Monitoring/disciplining of big business

  • Control of foreign direct investment

  • Capital flow restrictions

Using directed credit by policy banks

Real interest rates on directed credit

Trade policies?

Protection in Korea

  • Miracle Report argues that HPAEs were in fact more open than other developing countries, more ‘outward oriented’… but so what?

  • This ‘may be soothing to the bank, but it is not really relevant – the real issue … is whether they distorted their prices at all’ (Lall, 1993: 651)

So did these various interventions work??

Revisionist view

  • industries which require intensive employment of capital and technology, industries that in consideration of comparative cost of production should be most inappropriate for Japan, industries such as steel, oil refining, industrial machinery of all sorts, and electronics … From a short-run, static viewpoint, encouragement of such industries would seem to conflict with economic rationalism. But, from a long-range viewpoint, these are precisely the industries where income elasticity of demand is high, technological progress is rapid, and labour productivity rises fast ... Japan has been able to concentrate its scant capital in strategic industries

    (Wade, 1990: 25)

Market friendly view of these industrial policies:

  • Industrial policy defined as ‘governments efforts to alter industrial structure to promote productivity based growth’

  • Attempts to influence industrial structure generally unsuccessful, it is argued

  • Those sectors that were targeted did not experience significantly higher productivity change

  • But problems with these calculations and the argument as a whole

‘Pointing the gun inwards’ (Amsden, 1993):

  • ‘we find very little evidence that industrial policies have affected either the sectoral structure of industry or rates of productivity change … industrial policies were largely ineffective (p.312)

  • Because ‘manufacturing sector seems to have evolved roughly in accord with neoclassical expectations: industrial growth was largely ‘market conforming’ (p.315)

‘Market friendly’ approach

  • ‘Private direct investment and rapidly growing human capital, were the principal engines of growth … in this sense there is little that is ‘miraculous’ about the HPAEs superior record of growth; it is largely due to superior accumulation of physical and human capital (p.5)

  • the eight economies tend to favor the importance of doing the fundamentals well’

  • East Asian success sometimes occurred in spite of rather than because of market interventions.


  • State did play a large role, not just providing the ‘fundamentals’ but also supporting specific industries, those capable of exploiting economies of scale. Especially the case in Japan and South Korea

  • East Asian Miracle Report drew heavy criticism, but we should not forget that fundamentals are important (human/capital investment)

A Focus on our own path of growth and developmentChina’s economic success has surprised the world

  • Since the late 1970s, there have been 30 years of impressive changes in China. China today and China 30 years ago have presented a totally different image, an image that is somewhat unimaginable to both China and the whole world: To many, a formerly poverty-stricken country has now created an economic miracle within 30 years.

  • The soft power of erecting examples for other developing nations

How to explain the Chinese Miracle?

  • Big Bang vs. Gradualism (Probing for a way forward)

  • Two types of transitional approaches: orthodox vs. unorthodox: The former Soviet Union and China in contrast.

  • Institutional Change: from HRS to Private entrepreneurs joining the Party

  • China’s focus of economic reform: using both hands (state and market); using increments to reform the stock; using market to exchange the tech.; using opening (trade) to promote development.

Approaches: the ‘cat’,’ stone’ and ‘scientific’ concepts of development theories

Goals: Development is a paramount obligation, but with both hands: ‘state’ and ‘market’.

Building a harmonious society.

Challenges of globalisation, development and transition.

Conclusion 1Competing theoretical paradigms

The proponents of competing paradigms practice their trades in different worlds ... [they] see different things when they look from the same point in the same direction.

(Kuhn 1970: 150)

Conclusion 2

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